Payday Loan Solutions For a Hazardous Industry

This past season, I have talked extensively with industry experts about payday loan solutions and alternatives. When I asked my guests from show 83, Brian Dijkema and Rhys McKendry, and my guest from show 85, Jonathon Bishop about what they think would improve the payday loan industry, they had so much to say that I wasn’t able to air everything in the original podcasts. Today, I am sharing their previously un-aired thoughts.

Create alternative payday loan models

Brian Dijkema and Rhy McKendry, experts from the Cardus think-tank, authored a study titled: “Banking on the Margins: Finding Ways to Build an Enabling Small Dollar Credit Market.” They suggest that the solution to payday loans is for communities to pool their resources to provide financial products with the assistance of someone with financial expertise that can help them evaluate risk.

Rhys adds:

I think the real challenge is that the economics in this market are challenging, small dollar loans with consumer that are generally higher risk, default rates are higher, loan losses are going to be higher. [We] need to find a way to provide a service that is sustainable.

Brian and Rhys share the example of Vancity, a credit union offering a small dollar loan similar to a payday loan product, that is sustainable for the credit union. But they also provide the example of a credit union in Calgary offering a similar product with the help of philanthropic support that’s losing money but learning a lot about how to structure these products.

In the end, they advocate for more research and funding to be directed into exploring options and piloting programs to see what works the best as an alternative to payday loans.

Eliminate abusive interest rates

Jonathon Bishop, a Research and Parliamentary Affairs Analyst with the Public Interest Advocacy Centre, suggests that the federal government repeal the usury law back to what it was before 2007. This would remove the exemption from the criminal code that allows payday loan companies to operate as they do and make payday loans as they are today illegal. Alternatively, Jonathon suggests that provinces could lower the maximum interest rate payday loans can charge incrementally over a period of a few years to allow the payday loan industry to adjust to these new rules.

He also suggests that the payday loan companies should report to the credit bureau so that borrowers who repay their loan can receive a modest boost to their credit score.

Lastly, Jonathon suggests that municipalities place restrictions on how close payday loan locations can be to one another and charge them a licensing fee.

Use alternatives to a payday loan

On show 92, I asked Ted Michalos what someone could do instead of getting a payday loan? If, for example, your rent was due, Ted suggests speaking with your landlord and asking them if you can pay the rent once you get paid in the next few days. He also suggests looking into a line of credit, using overdraft, or borrowing from a friend or family member.

FULL TRANSCRIPT show #99 with Brian Dijkema, Rhys McKendry, and Jonathon Bishop

Doug Hoyes: It’s the summer of 2016 and as is our custom we run best of shows where we rerun the most downloaded episodes of Debt Free in 30. Today is not a best of show, I’ve got two never before heard interviews for you but it is a show about one of the most frequently discussed topics on the show and that’s payday loans. This is show number 99 and back on show number one, which is one of our most downloaded shows, Ted Michalos rants about payday loans.

On show number 83, I had Brian Dijkema and Rhys McKendry from Cardus talking about payday loans and on show number 85, my guest was Jonathon Bishop and they both had a lot to say about this topic. I asked all three of them to give me their solutions to the payday loan problem and they had so much to say that I wasn’t able to air everything in those original shows.

So, today we’ve got their practical thoughts. To start let’s hear from Brian Dijkema and Rhys McKendry from Cardus who authored a study called “Banking on the Margins, Finding Ways to Build an Enabling Small Dollar Credit Market”. Back on show number 83 we talked about the problems with payday loans and how they charge too much money, and whether or not the government should get involved. And my conversation with them, after we finished recording the main show, we started talking about solutions and I started by saying to Brian the solution seemed obvious to me.

Here’s what I said and here’s Brian’s response. The solution seems pretty simple to me Brian, go out, raise 100 million bucks, you know, I mean I’ll kick in the first 50 million ’cause hey, I got all that kind of money sitting out. And we just go out and start this organization to do this. We don’t need the banks to help ’cause we’re starting out own financial institution, whether it’s a bank or a money market or a payday loan lender, a small loan lender, whatever.

We’d be able to use all the latest technology, it’d all be online and you keep the costs down. We’d be able to tap into the network of churches and YMCAs, and what not, and have facilities in their basements and things like that. I don’t need the bank, I don’t need the government, I don’t need anyone else if we were able to do this and we would run it on a break even basis. So, at the end of the year there’s no profit, there’s no loss, is that the answer to your problems? Do you just need 100 million dollars and we can make this all happen?

Brian Dijkema: My response is I think there’s a lot of that going on already and folks are actually starting to explore what to do with that. I mean there are – that’s what we note in our paper, there are a number of alternatives that are arising and I know that some people have different perspectives on them. For instance MOGO is an online lender, there’s Borrowell, there’s an increasing number of peer-to-peer lenders that take exactly that approach that you say, look we’ve got some capital here, we understand that we can provide a service in a market that is not, doesn’t have a lot of diversity. And so, there are lots of people who are doing that, some on the for profit side of things.

I think on the – if there’s 100 million – I do think that’s a real challenge and I think that’s one of the things we recommend, there is a need for a community to get together who recognizes this is a challenge, an economic challenge, to pool their funds together to help fund and help provide some alternatives. I think as I said, some of that’s going on in the tech world, the financial fund tech world, but in the credit union world, they’re not banks but there are those who are working on this issue.

The challenge is of course that if you’re going to offer a product or you’re going to offer these types of loans, you have to have the financial expertise and the whole infrastructure to support your delivery of that. And when you start looking around for who’s going to do that or who’s best suited to do that, you end up looking at financial institutions or some of these other online providers.

And so, I think that’s absolutely the right step that there does need to be a pooling of capital and we’re talking about that, civil society, churches and a number of others doing that. But you do need to have somebody with a financial expertise who’s able to manage loans, who’s able to do some of that risk analysis that is absolutely important that can feed into credit reporting so that people can be building it up. So, there’s a whole host of infrastructure that goes into the money marts. What needs to happen is that the infrastructure that already exists in the financial world needs to be redirected or focused on this issue. And if certainly, you know, generous philanthropists like yourself have 100 million bucks that they want to contribute I think that’s a key part in making that a success.

Doug Hoyes: And so what I’m really need to do then, I guess really I need a billion dollars then is I would need to go out and buy somebody who already exists, a, you know, a payday lender, a credit union, a small bank if there is such a thing. And then shift the focus from purely being a profit making enterprise to being an enterprise that actually helps the customer.

So, we would offer loans, I mean as you suggested earlier Rhys, that instead of having to pay us back in 10 days, you can extend it up to four months or six months or whatever. And we would report those loans to the credit bureau so it is helping your credit rating which would make you therefore more about to borrow at a regular institution at lower rates. We would obviously have a financial education component to all of that. So, there would be literacy resources and things like that, explaining the cost of credit. Is that the kind of thing that would have to be envisioned in this mythical new company that we’re going to raise a billion dollars to get started?

Rhys McKendry: Yeah. Certainly all those elements are part of it. I think the real challenge is that the, as I said before, the economics in this market are challenging, small dollar loans with consumer based that is generally higher risk, default rates are higher, loan losses are going to be higher. Need to find a way to provide a service that is sustainable. We need to look at Vancity, which is the largest credit union in Canada; they found a way to provide a small dollar credit product that is financially sustainable for the company.

Now the way that they’ve done that is they’ve created a process that is efficient and fast, that does restrict in some capacity who they lend to, but it’s providing a service that is quick and available to people that couldn’t get credit from other sources. So, there’s a lot of challenges that are involved in providing this type of service but –

Doug Hoyes: Well, and what you’re saying and I’ll let you chime in on this as well Brian, even if I did have a billion dollars, making these loans would lose me money every year. That’s the potential risk. I mean if I’m not charging 542% interest, then inevitably I’m going to have some loan losses and that is going to cause a problem. So, is it almost impossible to do what I just sketched out there?

Brian Dijkema: No, it’s not. And I would say that it’s not inevitable that you have major losses. As Vancity is an example of an organization that has done it and they’re not making a huge profit but it’s certainly sustainable. And I think that’s what they’re looking at.

The one challenge I think – finance is complex and you know it works with folks who are in debt and what it does, I think one of the real challenges is recognizing that we’re not as rationale as we like to think we are. And I think that that’s an important part to remember on this type of issue. Many of us can review if we’re all sort of sitting at a desk and, you know, we don’t have any other worries and any other stress. We don’t have any bills due now. We can look at the six options out there and say this one’s going to be best for us. But that’s not often the way people make financial decisions, even smart, well-educated people, even financially literate people.

And payday loans, payday loan firms have done a good job of getting that type of response, you get in, you get in really quickly, you’re approved really quickly. And if you’re going to look at providing an alternative you have to find a way to address those issues, to make sure that you’re putting people on the right path, that they’re taking these challenges and actually directing the right path rather than onto the path of dependency.

Doug Hoyes: Well and you’re right, payday loan places are very friendly. They’re very easy to deal with, they’re great, you go in, they make you feel good, they’re happy, you know, you qualify. Whereas when I go to a bank, oh my goodness, I get the third degree and they got to, you know, photocopy this and photocopy that and it’s three days to check my credit, and this and that, so it’s a problem as well.

But well, so to summarize it though, yes it would be possible to explore these other options and I guess that’s really what you’re advocating in the study that there is no one right answer, we have to look at the other options. So, Rhys, do you have any final comments on that or is that pretty much summarizing it?

Rhys McKendry: Yeah, I think you hit the nail on the head is that what we’re really advocating is that we need to put more efforts, more resources, into research and development, and into experimenting and into piloting alternatives. There’s a credit union out west in Calgary right now that through the help of philanthropic support that they’re piloting an alternative and they are losing money on that specific pilot. It’s not a huge amount of money but they’re losing money. But they’re learning a lot about how to provide alternatives, how to structure that product. So, that’s the type of work that we need is to put resources and money into figuring out ways that we can provide better alternatives to consumers.

Doug Hoyes: Excellent. Well, that’s a great way to end it, thanks very much guys for sticking around for a little bit more discussion. Brian Dijkema, Rhys McKendry, “Banking on the Margins, Finding Ways to Build an Enabling Small Dollar Credit Market”, the study by Cardus, thanks for being here guys.

That was my discussion with the guys from Cardus. Here’s my discussion with Jonathon Bishop.

Today we’re talking about solutions to the payday loan problem, how can we lessen people’s dependence on payday loans? Should it be the government involved or how should it be done? So, I’m joined again by Jonathon Bishop who is the Research and Parliamentary Affairs Analyst with PIAC, the Public Interest Advocacy Centre, and Jonathon is talking to us from Ottawa today.

So, Jonathon, when you were on our show a little while ago, you gave some practical, potential solutions on how to deal with the payday loans. So, I mean if I may rhyme them off here, which you told me the first time around, limiting the number of payday loans that somebody can get in a certain period of time, lengthening the time that they have to repay them so instead of having to pay it back in 14 days, maybe you pay it back in a month or two months, reducing the interest rates, considering the borrower’s ability to repay before giving a loan.

What other solutions are potentially out there that if I gave you a magic wand and said here you go, you have the power to either change what businesses are doing or change what municipal or provincial or federal governments are doing or change anything else, what are some other things that you would be on your list to solve the payday loan problem?

Jonathon Bishop: Thanks Doug. The first thing I would do if it were me and you gave me the magic wand.

Doug Hoyes: I did, magic wand.

Jonathon Bishop: I would tell the federal government essentially to repeal the exemption that’s sitting there right now in the criminal code for the usury law. And that would eliminate – it would eliminate the need for all these other things because if the usury law goes back to the way it was prior to 2007, then payday lenders would have to operate in some kind of a different manner drastically ’cause the product they’re offering would now be illegal.

Doug Hoyes: So, can you explain that to me? I know we touched on it on the first show we did but when you say the federal usury law, the rates set in the criminal code is 60% so I cannot give someone a loan and charge them a 70% interest rate. That’s not allowed, that’s against the criminal code. But the reason payday loan companies are able to offer a loan where you’re paying a 20% interest rate but you’re paying it every two weeks, so it adds up to 5 or 600% is because there is a specific exemption in the criminal code, the federal criminal code, that allows them to do that. Am I correct on that?

Jonathon Bishop: The exemption was passed in 2007, it basically describes what a payday loan is, it says make a description and stick to it, and then if the provinces create the proper regulations then a payday loan as a product are allowed to be offered. And that’s what’s happened in a number of provinces throughout Canada, however not all the provinces in Canada.

So, when you gave me the magic wand and I said repeal the exemption that would be great. Or you could do what the province of Quebec has done and instead of making regulations that allow the operation of payday loans or as it is in the rest of the country, they reduced the allow maximum allowable interest rate from 60% to 35%. And basically told the payday loan provider deal with that particular scenario and we’ll see what products you offer then, which basically has greatly curtailed the operation of these industry players in that province.

Doug Hoyes: Now I guess the devil’s advocate response to that would be well, okay if you tell the payday loan companies that instead of charging $21 on $100, they can only charge $5 on 100, then presumably they all go out of business tomorrow? Because they don’t have time to adjust to that new reality and does that make things worse ’cause now we’re all dealing with loan sharks and they break your legs if you don’t pay and that’s probably worse than what we got now. Drawing on your experience in other industries, is there a way that this could be, that these types of regulations could be implemented over time?

Jonathon Bishop: Yes, yes there is. One of the first research reports I did for the Public Interest Advocacy Centre was on wireless day of roaming. So, the notion that you go away on vacation, take your cell phone with you, your smartphone with you and sometimes receive a large bill for using data in another jurisdiction, this bill shock notion. This was happening pretty much across the globe, say, 10 years ago and still happens to an extent today.

But what the European Union did in response to this was advise wireless operators look you can charge X amount for data today but in two years that number is going to drop by 10%. Two years after that that number’s going to drop by another 20% and laid it out in a long enough time period that so like a six to eight year time period going forward to give those operators and industry to adjust to a new rate.

And in PX’s submission to the government of Alberta’s call for consultation in regard to payday legislation, which also happened in the fall of last year, we actually suggest this as a possible consideration, laid out basically a little chart and said look over the next 10 to 12 years, we suggest that you let the payday loan operators know that you intend to drop the cost of borrowing by $2 per $100 borrowed in year one, three years from now, five years from now, just to kind of say this is a potential option.

Doug Hoyes: So, in theory then the limit in 2016 is $21 on 100 and in 2017 it could be $20 on, 2018 it could be $18, $16, $15 and as you go so that eventually like you say five, 10 years ago the limit is $10 on 100 or whatever the number is, and as a result the short-term loan industry has time to adapt to it and it become less of a jarring shock, is that essentially the concept?

Jonathon Bishop: That’s essentially the concept. Now this doesn’t all happen in a vacuum, so I’m sure the industry folks have plenty of time to go back to the provincial government and say this rate is now really hurting us and that will be evidence by adjustments in the market. And what I mean by adjustment in the market is payday loan operators will probably have to leave the market once that maximum cost of borrowing rate hit a certain level.

Doug Hoyes: Got you, which may or may not be a good thing I guess depending on what they are replaced with. So, okay so we’re talking about potential solutions, what other things has your organization advocated in the past or what other things are you thinking about?

Jonathon Bishop: Well, one of the items that’s generally overlooked and hasn’t received a lot of play is the notion that when you’re a borrower of a payday loan product, there’s no positive in this in terms of your credit rating. Now – and usually you can’t get access to a financial better say interest rate applied to you because you don’t have a credit history or credit history maybe not be the best.

What PIAC has advocated in the past is look if you’re going to use a payday loan product perhaps there should be some positive in terms of issues that you’ve used two or three. This goes into your credit history, so it kind of shows that yeah, I’ve made short-term loans at a very high interest rate but I’ve been paying them back, some kind of positive contribution to your credit rating might be at least some small benefit for having to go through this process.

Doug Hoyes: So, the payday loan company would report to the credit bureau that the loan was paid, and potentially that shows something positive on your credit report, which may then allow you to borrow, increases your credit score so perhaps you can then go to a conventional lender.

Jonathon Bishop: Right. I mean I can see the devil’s advocate perspective where the industry would say well why would we help our customers go to a competitor? On the other hand you are operating under an exemption to an existing criminal code law so maybe you should just do what the good folks at the regulators tell you to do.

Doug Hoyes: Yeah, it’s kind of like okay you’re a builder, you want to build a huge condo in downtown Toronto, fine, we’ll let you do it, but you’ve got to kick in some money to pay for the roads and the schools and everything else that the residents or your condo is going to use, you get the good with the bad. So, I think that all makes sense.

We had talked earlier about, well in our previous show about the physical space that, you know, payday loan companies are kind of everywhere now. And we’ve been talking about federal and provincial regulations, is there anything to do with real estate or physical space or anything like that at the municipal level that would have anything to do with any bearing on payday loan companies?

Jonathon Bishop: Absolutely. A number of municipal governments have been struggling with this issue and at least bringing it up for debate. I can think of in Ontario, Hamilton’s done this, Ottawa has some rumblings of this in other jurisdictions and I think in Calgary and other cities. One of the options that keeps coming up is to basically attempt to physically separate operations from one another through land use laws.

So, coming up with a bi-law that says look if there’s a already a payday loan established in a neighbourhood, the next one closest to it can’t be at less 400 metres away to kind of physically separate the institutions from one another ’cause they have a tendency to kind of conglomerate in certain neighbourhoods sometimes. That’s what the studies have shown to us.

And another option that’s been bandied about at the municipal level is licensing fees that are associated say with payday loans. So, if you’re going to operate a payday loan shop then you’re going to have to pay a license fee to the city. That’s been bandied about as well and then increasing those fees.

Doug Hoyes: Got you and by separating them it makes it slightly more difficult for me to go to one payday loan to borrow so I can pay off last week’s loan. I’ve got to, you know, you’re putting up some barriers and hopefully that slows some people down. So, okay so those are certainly some solutions we haven’t addressed before. Is there anything else on your list of potential solutions to the payday loan problem?

Jonathon Bishop: No, I think I’ve gone through everything I had.

Doug Hoyes: No, that’s quite a few so I certainly appreciate that. So, great thanks very much Jonathon I appreciate your list of possible payday loan solutions. Thanks for joining me.

Jonathon Bishop: My pleasure, thank you for having me Doug.

Doug Hoyes: That was my discussion with Jonathon Bishop. We’ll be back with more right after this, you’re listening to Debt Free in 30.

It’s time for the Let’s Get Started here on Debt Free in 30. In the first segment we talked about legislative changes and the other big picture solutions to the payday loan problem.

For the Let’s Get Started segment we focus on practical solutions that our listeners can implement. We know from studies we’ve done that people who get payday loans have a lot of other debt, that’s why in a lot of cases they’re getting payday loans. It’s not just to pay their rent next month, it’s to service the debt they’ve already got so existing debt is a significant problem.

Back on show number 92, I asked Ted Michalos for some practical advice, here’s some, here’s his answer to my question what else can I be doing instead of getting a payday loan?

Ted Michalos: Well, let’s view two different scenarios for why you’re getting a payday loan, so one of them is the example you just gave so my rent is due. The practical solution is go talk to the landlord, see if they’ll wait for a week or two, even if you have to give them a little bit extra to pay your rent. That’s a better solution than getting a payday loan at 546% interest. That’s a treadmill that you may not be able to get off.

Doug Hoyes: And that’s something people don’t think about.

Ted Michalos: Right.

Doug Hoyes: So, yeah of course you’re rent but if you are three days late because that’s when your pay cheque comes in, are you going to get evicted instantly?

Ted Michalos: Well, on top of that I know people now who have asked their landlords and they pay rent with every pay cheque. So, then it was always a problem for them to come up with a large sum at the end of the month so now they pay half on the 15th and half at the end of the month or every two weeks when they get paid. And that works better for them ’cause budgeting is a challenge.

Doug Hoyes: And that may be hard if your landlord is a big huge corporation and you’re in some big tall apartment building but if you’re renting from the lady upstairs then she may be fine with that. And even if your landlord won’t do that, you can set up a separate bank account, put the money in every two weeks and that’s where the landlord takes the money out.

Ted Michalos: So, this sort of solution will work for all sorts of things, the landlord, the utilities and that sort of stuff. If the issue is you’re borrowing because of debt and you’re having a problem making your minimum payments then you really need to investigate some other things. First and foremost have you looked at an overdraft on your bank account or perhaps getting a line of credit?

Now we know from our personal experience that by the time most people get into payday loans they’ve already exercised all of these options. But there is a portion that haven’t. So, overdrafts you’ve always been told is very expensive, it’s 29% interest. 29% interest is a hell of a lot better than 546, so if you haven’t got one, look into that.

Doug Hoyes: Yeah, look into all options is really what we’re saying. If your parents, if you’re brother can loan you the $500 you need to cover rent then that’s probably a better option than a high interest payday loan. Payday loan places are very friendly, they’re easy to deal with. They’re friendly, they’re happy, you got your money quickly. Banks are a pain to deal with. There’s nobody to talk to, everybody’s a salesperson, you got to fill out all sorts of forms. But what you’re saying is that’s something you should still investigate first before going for the high interest option.

Ted Michalos: Do it first, that’s right. And at the end of the day if you find yourself that really payday loans do make sense, maybe you should be seeking some professional advice about your debt overall, one of the things we specialize in doing is restructuring people’s debts. And we’ll honestly tell you if alright you’re in enough trouble that maybe we should be looking at something called a consumer proposal or perhaps even personal bankruptcy. But the majority of people we talk to actually just need some sound financial advice. You need to be handling your money differently to get over a hump.

Doug Hoyes: So, if the reason I’m getting a payday loan is because I’ve already got $20,000 of other debts and I’m having trouble making the payments on that, the solution is not to get a payday loan, the solution is to deal with the other debts.

Ted Michalos: Correct.

Doug Hoyes: Now do consumer proposals work for payday loans?

Ted Michalos: Certainly they do, a payday loan is like any other debt in the eyes of the law. It’s an unsecured debt. If you don’t pay it, they don’t have the right to come and take your house, your car, your – they can’t garnishee your wages without taking you to court. So, in that respect it falls under the same category as a credit card or income taxes or anything along those lines.

Doug Hoyes: And just on that point of not being able to garnishee your wages without taking you to court, what a lot of payday loan companies will do is have you sign a voluntary wage assignment. But that’s not really enforceable if you decide to un-volunteer it, is that correct?

Ted Michalos: If you were to call your payroll department, your HR people and say you know what? I withdraw my consent, they legal can’t deduct it from your pay. In fact most payroll departments these days won’t implement that procedure anyway. ‘Cause there’s a cost to your employer, they don’t want to do it, it’s a pain in the something.

Doug Hoyes: So, but again this is where you’ve got to be proactive and talk to your employer. Now if your payroll employer says hey no, sorry I’ve got the piece of paper, I’m taking it off your cheque, well unless you want to have a fight with your employer then I guess it has to be dealt with. My point is there are other solutions, a consumer proposal or a bankruptcy being one of those. And I guess the upside in a consumer proposal is the payday loan person isn’t the one who’s going to decide it.

Ted Michalos: Correct. I mean if you think about it even if you’re one of the extreme cases where, you know, it’s 10 or $11,000 worth of payday loans. Probably that person has 40 or $50,000 worth of credit card debt. The way a proposal works is the majority of the dollars you owe you have to agree. The payday loan guy may have no interest in participating, but the credit card companies will happily agree to 30% and so, they’re forced into the same solution. It deals with all of your debts. It gets to the route of the problem as opposed to the symptoms, which is all a payday loan ever does, it buys you time.

Doug Hoyes: And there you go so deal with the route of the problem and the consumer proposal, the creditors get one vote for every dollar that’s owed, it’s very rare that the payday loan people are the deciding vote, it’s usually the other creditors, so usually there is a deal that can be made.

That’s an excellent way to end it, deal with the underlying problem. Thanks for being here Ted, we’re going to take a quick break and wrap it up. That was the Let’s Get Started segment right here on Debt Free in 30.

Doug Hoyes: Welcome back, it’s time for the 30 second recap of what we discussed today. On today’s show my three guests gave their solutions to the problems caused by the payday loan industry. We covered legislative changes and other innovative solutions to the payday problem. That’s the 30 recap of what we discussed today. We’ve done a lot of shows on this topic this year and with all of the research I’ve done on this topic, payday loans, my advice on payday loans is very simple, avoid them. There is almost always a better solution.

If your rent is due on the 1st but you don’t get paid until the 3rd, ask your landlord for a three day extension. It’s unlikely you’ll get evicted for being three days later. Then make a plan to set aside your rent money early so it doesn’t happen again.

If your problem is that you have too much other debt, getting a payday loan to pay the interest on your other debt is a horrible solution, you need to deal with your other debt. That may mean doing a consumer proposal or a bankruptcy. If that’s what it will take to deal with your debt, then that’s what you should do. A permanent solution should be better than struggling along with high interest payday loans, because once you get on that payday loan hamster wheel, it’s very difficult to jump off.